That was the reaction Monday of traders and economists to the European Union's coordinated decision to invest a staggering $2.4 trillion in interbank loan guarantees and bank recapitalizations, ft.com reported, to end the global financial crisis.
(Of course, 'gosh, golly' etc. were not exactly the reactions of traders and economists -- this is a family-appropriate financial blog -- but you get the point.)
Europe's decision sparked a global rally in stocks. The Dow closed up 936.42 points -- the largest one-day point gain in its history -- to 9,387.61.
Europe takes the lead
At minimum, Europe is saying that its economic stake in the current global financial system is so large that it's willing to err on the side of over-committing public funds, economist Peter Dawson said.
"Europe's response is very large, unexpected, and it could prove to be the pivotal move in this crisis," Dawson said. "Europe appears to be saying, 'well the United States is doing what it can do, given its political constraints' now let's do what our political culture allows. Basically, Europe is saying 'the storm of fear starts to lose its strength here.' "
The measures were both sweeping and unprecedented in size and scope, Dawson said. Germany said it offered about $680 billion in loan guarantees and will invest $108 billion in its banking system, ft.com reported. France said it would provide up to $435 billion in loan guarantees and invest as much as $52 billion. The United Kingdom has committed about $70 billion for investment in key banks, along with a guarantee for banks deposits and interbank lending. The Netherlands, Spain, and other nations announced similar plans.
Economist David H. Wang agreed that Europe's 'supranational' intervention may have been motivated in part by the U.S.'s reluctance to recapitalize banks quickly, but that does not exempt the U.S. from banking recapitalization, and other rescue programs. "While allowing for shared costs between Europe and the U.S. to address a global problem, the burden is on the U.S. because the root cause of the problem is here," Wang said. "Fiscally, Europe has spoken to help restore confidence and is now saying 'the ball is your court U.S., so serve the ball.' "
Meanwhile, currency traders interpreted Europe's move as a step toward financial system stabilization, a universally-welcomed step, said Currency Trader Andrew Resnick.
"It will lead to more-normal capital flows, longer-term, which is progress. Today, traders actually thought about economic fundamentals, instead of flight-to-safety, which has dominated the past two weeks," Resnick said. Short-term, it's a good time to be flat, Resnick added, with the euro first rising about 2 cents versus the dollar, then reversing to trade flat at $1.3568 Monday afternoon, on concern the ECB will have to cut interest rates further to stimulate economic growth. As one might sense, Resnick is flat, or has no open trading positions.
Wang reiterated the need for the United States to "fulfill its obligations as part of this recovery process."
"The United States has a unique opportunity to correct a problem it largely created with its bad mortgage backed securities and bad mortgages, and to get considerable international help toward that solution," Wang said. "In my view, that's a pretty good deal."
Monetary Policy / Economic Analysis: Echoing economist Wang, the U.S. Treasury, currently meeting with executives from major U.S. banks, needs to specify very soon what it plans to do fiscally to fulfill its part of the financial crisis recovery plan, during which the major economies pledged that there will be no additional bank / institution failures that would jeopardize the global financial system.
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Reader Comments (Page 1 of 1)
10-13-2008 @ 7:31PM
jkprblmslvrs said...
Why do they keep saying bad mortgage backed securities and bad mortgages??? That is NOT where the blame belongs!!! It belongs on the heads of the people that rose the property values well above market value!!! This entire fiasco would end overnight if they simply re-lower property values. Then we can re-afford to maintain our payments!!! DUH!!!!!!!!!!!
10-13-2008 @ 11:14PM
John said...
Mexico commits another 5 million Illegals to the United States to ease their burden!!!
10-14-2008 @ 1:41PM
John said...
The bankers didn't regulate their own industry so they have brought more regulation by law upon themselves. So be it. However, there has been at best no Congressional oversight in banking and at worst complicity to defraud by the very Congressmen and women responsible to oversee the laws they wrote. Impeach and imprison to the full extent of the law. Martha Stewart showed the way by example how to treat the cheats.
Now let's see... that leaves Palen as the only one running who is qualified to be President. We can't put a felon in the White House and the other three running were in the Senate not doing their job. Hillary, get in line.
Sam Nunn, step up to the plate one more time for us please. Reset the standards for representation which were in place when you and Bob Dole first stepped up to serve. Inspire and train new leadership that puts country first.